Location decisions are about where to site the company’s buildings (e.g. its factory, head office and/or its shops). As with most shop owners views, the three most important factors to success is location, location and lo action. However, good location is incredibly difficult to come by and is also very expensive. There are several factors that will influence a firm’s choice of location: quantitative and qualitative factors.
The quantitative ones take into account the financially related factors, whereas the qualitative ones are concerned with the non-financial influences, such as family links that may attract the owner to a particular area.
Cost of Land
If a firm decided to choose a high-cost location, the prices of it has to charge may increase to cover the increase in location costs. This may the firm less price competitive and is why most firms will seek for the lowest cost location to stay most competitive.
The possibility of expansion is crucial if the firm is deciding to try and expand early. It will be a lot cheaper and less disruptive if the business can expand on the premises they already have rather than having to relocate to a larger premises.
Accessibility of Supplies
The location of the firm near a supplier is dependant on if the firm is using large materials that are costly to transport. It would make logic to be close to the supplier then and would make the firm cost-effective. These types of firms are referred to as bulk-decreasing. A firm that runs a just-in-time system would benefit from being close to the supplier too.
On the other hand, firms like soft drinks companies would be described as bulk-increasing as their products gain weight throughout the production process through the addition of water, so they would be more likely to locate nearer the market. Today, the bulk decreasing theory applies less for two reasons: first, better transport links mean that the costs of transportation has fallen, thus firms are not under as much pressure to locate nearer their suppliers; second, the growth of the service sector has meant that firms locate nearer the consumer.
The skill and size of workforce required will be dependant upon the nature of the business. If a firm needs a large workforce it will have to ensure that it locates in an area that is accessible or close to populated areas that can supply the required labour. Locating in an area with high employment may create recruitment difficulties, which may constrain a firm’s chance of success, especially as it grows.
Locating to a firm’s market is the mots important factor. You don’t expect a customer to travel miles for hairdressers, restaurants or shops. However, there is an increasing number of service industries that sell via the internet; such firms are able to operate from cheap out-of-town locations as customers will not need to visit.
Infrastructure describes the provision of all services in an area, including its transport links, telecommunication systems, health services and educational institutions. For many firms, however, it is the transport links that represent a key influence on their choice of location. In order for a firm to organise its operations smoothly it must be able to access its suppliers and its market quickly and cost effectively. This is not always possible if transport links are poor. Remember, however, even when an area has high-quality infrastructure, it may be so popular with businesses that the resulting congestion may reduce accessibility. Think of the M25 motorway at any time of the year!
Financial incentives offered by the government in an attempt to help areas with high unemployment may affect a firm’s choice of location. However, there are restrictions on the types of firms that can attract this funding and it is unlikely that a new firm will meet the criteria necessary to attract funding.
In addition to the quantitative factors, some owners of business may choose their locations for purely personal reasons. Some firms locate in areas due to the high quality of life and beauty that the area provides.
So Which Factor is Most Important?
This will depend on the nature of the business. The factor that may attract one firm may not attract another. Some new businesses may select their location purely on the grounds of personal preference, whereas others may select the least-cost location.
Bulk decreasing/bulk increasing – a firm that uses large, bulky materials to produce smaller end products/a firm that uses low-volume materials to produce large end products.
Footloose – a firm that is not tied to a particular location as it relies on technology and communication links.
Infrastructure – the network of utilities, such as transport links, telecommunications systems, health and education services.
Just-in-time – a manufacturing system that aims to minimise the costs of holding stocks of raw materials, components and work in progress by producing goods in response to a definite order, it requires efficient ordering and delivery systems.
Labour intensive/capital intensive – a process in which labour costs represent a high proportion of the total costs; small firms and firms in the service sectors are likely to be labour intensive; by contrast, a capital-intensive process relies more on machinery in the production of its products.
Least-cost location – a site that allows a firm to minimise its costs.